Few people seen selling yuan for dollars on first day of China's forex quota re-set

Lusha Zhang, Engen Tham

4 Min Read

A sign for foreign currency exchange is seen at a branch of the ICBC bank in Beijing, China, January 3, 2017. REUTERS/Thomas Peter

BEIJING/SHANGHAI (Reuters) - China’s authorities have sounded the alarm in recent weeks over the risk of capital outflows from the economy, but there was little evidence at Beijing and Shanghai banks on Tuesday that Chinese individuals were rushing to lock in 2017 quotas to buy foreign exchange.

Only a trickle of people at banks were seen selling yuan for dollars on the first business day of the new year, when buyers in theory could have made use of their quotas.

Under China’s capital controls, individuals are permitted to buy up to $50,000 in foreign exchange a year, and data shows January is typically a standout month for onshore foreign currency deposits.

The yuan shed nearly 7 percent against the dollar last year, its poorest showing since 1994, as policymakers struggled to contain capital outflows and preserve foreign exchange reserves in the face of a slowing economy and resurgent dollar.

Authorities have tightened monitoring of foreign exchange transactions out of concern over capital outflows.

China’s currency regulator this week began requiring Chinese individuals who want to buy foreign currencies to specify the purpose of the purchase and provide additional information, and said it would monitor transactions more closely and frequently as well as punish rule-breakers.

At major bank branches in two of China’s biggest cities, there were no queues on Tuesday, and the few individuals who changed money reported doing so with relative ease.

SMOOTH AND QUICK

“The whole process of changing money was pretty smooth and quick,” said an office worker surnamed Xu, who withdrew $500 from an ICBC branch in Beijing on Tuesday for a coming vacation in the United States.

Several other customers at banks in the two cities reported similar ease when changing amounts of money well below the quota.

However, it is unclear how much foreign currency exchange was being conducted online on Tuesday. Central bank data shows onshore foreign exchange deposits rose by almost 32 percent in the first 11 months of 2016, propelled in part by the yuan’s fall to eight-year lows.

Aside from the rising forex deposits, there has been little indication of growing unease among ordinary Chinese - although the authorities were taking no chances, repeating a mantra that the economy is improving and there is no basis for depreciation of the yuan in the long term.

Yang Zhao, chief China economist at Nomura in Hong Kong, said there wasn’t any widespread panic about the falling yuan, so he had not expected a surge in demand.

In recent months, analysts have noted that the yuan was not alone in falling against the dollar, with most other emerging market currencies also suffering, which has helped keep sentiment around the yuan from souring too much.

Zhao said restrictions on use of foreign exchange limited anyone’s options and so acted as a disincentive anyhow.

“You can’t buy real estate. You can’t purchase anything. Basically you can only park that FX in your deposit account onshore with interest rates that are very low,” he said.

Additional reporting by Shanghai and Beijing newsroom; Writing by John Ruwitch